Market Distortions
Coal subsidies

Both the mining and burning of coal is polluting, so one might expect to observe taxes on coal production and consumption. Yet several countries in Western Europe subsidise coal production, and most East European countries subsidise coal consumption. In Discussion Paper No. 1089, Research Fellow Kym Anderson uses neo-classical political economy to examine European coal subsidies, examining the reasons for them in the past and the changes in political forces that may lead – or in some cases have already led – to their reduction. After briefly reviewing Europe's changing coal market, the extent of policy distortions in mostly West, but also East, European coal markets is quantified and briefly compared with the extent of agricultural policy distortions.

The paper concludes that pressures for reform will continue to operate in the few remaining protectionist countries such that, if coupled with more commercial diplomatic pressure from coal-exporting countries, they could be sufficient to see the end of such protection by early next century. This will contribute to faster and cleaner economic growth. It would also be good news for producers in Eastern Europe with a comparative advantage in coal: their terms of trade would improve and their domestic coal consumption would be discouraged as the international price rise in coal is transmitted domestically.

The Political Economy of Coal Subsidies in Europe
Kym Anderson

Discussion Paper No. 1089, January 1995 (IT)